Since the enactment of the Affordable Care Act (which takes on new life everyday), many employers have asked us the question: “Can’t we just give our employees money and they can go buy their own insurance so we can get out of the business of buying insurance for them?” For small employers, the answer now is “Yes you can.”
Effective January 1, 2017, Congress enacted legislation enabling small employers (employers with 49 or fewer full-time-equivalent employees) to offer employees, in lieu of insurance coverage, a health reimbursement arrangement that is not integrated with a group health plan. Before January 1, that would have been illegal. Some smaller employers may be interested in establishing QSEHRA’s (Qualified Small Employer Health Reimbursement Arrangements) in lieu of providing insurance through a group health plan.
Here are some of the provisions and requirements:
- The employer must not be an applicable large employer (50 or more FTE employees) under the ACA.
- The employer must not offer a group health insurance plan that qualifies as “minimum essential coverage” under the ACA.
- All contributions are made by the employer. Employee contributions, even pre-tax contributions, are not allowed.
- All or essentially all employees must be covered. Limited exceptions apply to new hires (fewer than 90 days of service), part-time and seasonal employees, members of collective bargaining units, employees under age 25, and non-resident aliens.
- The employer’s contribution must be uniform, subject to adjustments only for the employee’s age and the number and ages of any covered dependents.
- For 2017, the dollar cap is $4,950 for an individual employee and $10,000 if the QSEHRA also covers dependents. The dollar amounts are prorated for partial year coverage.
- Annually, the sponsoring employer must give written notice to each covered employee explaining the rules applicable to the QSEHRA. Notice must be given at least 90 days before the start of the calendar year (or, if later, when an employee first becomes eligible under the arrangement). There is a $50 per employee penalty (capped at $2,500 per year) for failing to provide the notice.
- The amount contributed to an employee’s QSEHRA account must be reported on the employee’s W-2.
- The QSEHRA itself does not constitute minimum essential coverage and therefore will not enable an employee to escape the tax penalty under the individual mandate if the employee does not have other insurance.
- If the employee has other insurance – such as spousal coverage or coverage obtained through an ACA Exchange – the employer’s contributions can be made pre-tax. If the employee does not have other insurance, QSEHRA reimbursements are taxable. However, the employer does not need to withhold taxes on reimbursement amounts; it is the employee’s obligation to pay the tax on the amounts if they are taxable.
- Because the QSEHRA does not provide minimum essential coverage, a QSEHRA recipient may qualify for a federal tax subsidy to purchase insurance through an Exchange. The amount contributed to the QSEHRA, however, will offset, on a dollar-for-dollar basis, any tax subsidy the employee otherwise would receive.
- A QSEHRA contribution also could completely disqualify an employee from receiving a federal tax subsidy. That is because the contribution must be taken into account in determining the cost of employee-only coverage under the ACA’s affordability rules. So, if the QSEHRA contribution reduces the employee’s premium cost for the second-lowest-cost silver policy available from the Exchange to a level below 9.5% of the employee’s household income, then the employee is not eligible for federal tax subsidies on affordability grounds.
- COBRA (and state mini-COBRA) coverage continuation rules do not apply to QSEHRA’s.